SELECTION OF BUSINESS FUNDING PROPOSALS USING ANALYTIC

NETWORK PROCESS: A CASE STUDY AT A VENTURE CAPITAL COMPANY

1. PROBLEM FORMULATION
Corporate finance is regularly confronted with business process decisions.
Since it is one of the decisions that affect a company's financial performance, they are
often challenged to carefully choose the right proposal. There are many venture-
capital companies in Indonesia that conduct selection processes based on several rapid
analysis methods, while the criteria considered can vary considerably. There may
even be overlap between some of the criteria. To aid in the decision-making process
of the observed companies, this study employs the Analytic Network Process (ANP).
Due to the fact that ANP does not work well in cases where there are a large number
of alternatives, it is necessary to filter the alternatives using two criteria.

2. METHODOLOGY
This study uses data collected from the observed companies. The data includes
selection criteria, relationships between criteria, and proposed funding proposals. Data
processing consists of two steps, namely the initial selection with the Buffa & Sarin
approach and the use of ANP to rank the remaining proposals. Next, a sensitivity
analysis will be carried out on the rankings to find out which criteria have the most
influence on the results.
The Buffa & Sarin (1987) approach was used to reduce the number of
alternatives that were initially available before pairwise comparisons were made. This
approach was originally developed for the analysis of location problems. This
approach uses three factors in determining the best alternative location: critical factors
(CF), objective factors (OF), and subjective factors (SF). In this study, critical factors
were used in the initial selection process. Critical factors are conditions that determine
whether an alternative will be considered or not. If the proposal meets the factor, the
score is 1, otherwise it is 0. Only proposals with a score of 1 can proceed to the
selection process using ANP. This approach is expected to significantly reduce the
number of alternative proposals which in turn will shorten the time required to
conduct pairwise comparisons.
ANP selection will produce two results, namely the original ranking of the
process and the ranking resulting from the elimination of the best alternative, then
ANP is carried out again to determine the second-best alternative after the best
alternative is removed. This is called one-by-one elimination and is repeated until
there are only two alternatives left. AHP and ANP can only provide ratings, but when
it comes to deciding more than one alternative; optimal results cannot be obtained.
The problem in this decision analysis has been discussed by Russell (2007) in the
Borda Count Method. In the case of selecting this business funding, five main criteria
will be used: market, management, risk, legal, and financial. Legal aspects will be
used in both the initial selection process and the ANP selection process. The rating
and the results of the proposal will be analyzed for sensitivity to the composition of
the ratings.

3. FINDING
Data collection was carried out by means of focus group discussions,
questionnaires, and interviews. This resulted in two important factors to be used in the
initial selection process for business funding proposals: 1) the legal status of the
company that submitted it and 2) the business license of the company. In this case
study, the initial selection using the Buffa & Sarin approach succeeded in reducing the
number of funding proposals from 126 proposals to 27 proposals. These 27 proposals
continued to ANP selection. ANP uses 5 groups of criteria as described in the table
below, while the relationships in criteria are described in the figure below.

Criteria in the selection process

Criteria relationship diagram

Instead of the original process, a different approach was also used to rank
alternatives using ANP. This process is done by eliminating the best alternative, and
repeating the ANP to determine the best alternative among the remaining alternatives.
This approach is taken to check whether the results remain relevant due to changes in
the ranking composition due to the elimination of one or more alternatives. The
results show that when an alternative is ranked 7th, it does not mean that it will be
first when the 6 above are eliminated. The details of the ranking changes based on the
one-by-one elimination method and the original ranking of the ANP are in the table
below.
 Comparison of the two results of ANP

3.1 Changes in criteria’s weight

To check how sensitive the alternative ranking results are when the criteria
change, a sensitivity analysis is performed. The sections below describe the changes
to each criterion and their effect on the overall ranking. To illustrate the effect of the
criteria on changes in the overall ranking, we use the total change as a measure. The
total change is the number of changes in the ranking of each alternative when
compared to the original. This value will be used to indicate which criteria have the
greatest and least impact on the ranking. The table below shows that A2 and A1 have
the most significant effect on the results while C1 has the least effect on the results.

Total changes of each criterion

3.2 Number of alternatives and the resulted ranking

As discussed in the previous section, the ANP results in inconsistent rankings
when faced with selecting more than one alternative among many alternatives. The
previous table shows that of the 27 alternatives, 19 are ranked differently when using
the one-by-one elimination method. For example, alternative 18, it ranks 9 when using
native ANP. However, when the top 6 alternatives are removed from the list,
alternative 18 comes out as the best alternative among the remaining alternatives. In
fact, the original ranking had placed alternative 24 in the 7th rank which was actually
expected to come out as the best alternative when the top 6 alternatives were
eliminated. Somehow that didn't happen. In this analysis, the ranking is consistent
with up to 6 alternatives. To better understand this phenomenon, a retrial was
conducted on ANP after eliminating the 5 highest ranking alternatives, 5 lowest
ranking alternatives, and 5 lowest ranking alternatives. The results summarized in the
table below show that minor changes have been made when the available alternatives
changed. The changes are mostly in the mid to low rankings and they only include
minor shifts, not major changes. However, in very important decisions that can make
a big difference in impact, these small changes can be very important to note. In short,
ANP performs better in a decision-making process where only a small number of
alternatives will be selected, for example less than 5 in this case.
 Result from exclusion of several proposals

3.3 ANP and budget constraint

When using ANP in multi-criteria decision making, it only generates ratings
for the available alternatives. Additional consideration and analysis that includes
constraints and information that cannot be accommodated in the ANP may be
required by the decision maker to finally reach a final decision. In this case study, the
budget constraint applies to the problem. To model the actual conditions, a budget
limit of Rp. 10 billion is used. For the purpose of analysis, four scenarios were
developed: 1) fund the highest-ranking alternative, 2) fund the highest-ranking
alternative based on a one-by-one elimination method, 3) fund the lowest required
amount of funds, and 4) fund the highest possible expected return. The expected
return can be calculated by multiplying the MSME's expected profit and the profit-
sharing percentage.
In the first and second scenarios, the budget will be spent at the highest level
while the remaining available budget will be allocated to the next level with the
appropriate budget amount. The results of all scenarios are shown in the table below.

Result of scenario 1

According to the table above, scenario 2 provides the greatest return on the
required funding ratio, while scenario 3 provides a greater opportunity for proposals
to be selected. It depends on the goals of the company to decide which scenario is
best. ANP results can lead to different decisions depending on the company's goals.